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Apr 27

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Back to the Basics: Cash Flow (Part I)

People always say that, ‘Cash is King’, and as any good business owner knows, cash flow is essential to the survival of a business. Cash Flow is the movement of money into or out of a business, and can mean life or death for a business depending on how well it is managed. Good cash flow management leads to happier customers, easier payment to vendors, good investment opportunities, and an all-around less stressful business life.

money-235586_1280One of the main cash flow types is operational cash flow, where cash is received or spent as a result of a company’s business activities.  These activities include paying employee salaries and receiving payment from goods sold. Investment cash flows refer to cash received or spent during investment activities, such as acquiring or selling assets. Finally, financing cash flow is the cash received or spent through debt, like issuing stock or taking out loans.

Having cash on hand at all times ensures that owners can pay employee salaries, purchase goods to be sold, repay creditors, and afford to cover emergency expenses. Having too little cash on hand can cause insolvency, which is when a business is unable to pay its debts, and usually leads to bankruptcy.

One major issue with many businesses is that the company seems profitable on paper, but in reality it is not bringing in a sufficient amount of cash fast enough to survive. This was the case back in the 1970’s when America started seeing significant inflation periods. Business managers saw their businesses looked great on the balance sheet but didn’t actually have the cash on hand to pay employees, suppliers, and other expenses. It was then that the Cash Flow Statement was evolved to what it is today.

If business were a religion, The Cash Flow Statement would be its Bible. Unlike the Balance Sheet, which simply shows assets and liabilities, the Cash Flow Statement shows you exactly how much cash in coming into and going out of the business. It provides an in-depth look at how much cash you have on hand for the coming months so you can plan ahead during times when business is slow, which we will discuss next time.

Want to read more about Cash Flow in the meantime? Check out our post on the Benefits of Projecting Cash Flow for your Business.

In Part II of our Back to Basics: Cash Flow blog series, we will go into ways you can increase your cash flow and prepare for the unexpected. 

Permanent link to this article: http://c2cresourcesblog.com/back-to-the-basics-cash-flow-part-i

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